Small-Cap Investing

Swim where the sharks don't go.

When you buy shares of big, well-known companies, you're swimming with the sharks. Wall Street analysts spend their entire day focusing on these companies, looking for any edge that can earn them a profit. As an individual investor, you're unlikely to find something that everyone else has overlooked.

Small-cap stocks, on the other hand, are like a deserted lagoon. Too insignificant to have drawn Wall Street's attention, many small companies are pearls of potential profit, waiting for the right catalyst to value them into the limelight. Although there's plenty of risk involved, the rewards can be nearly limitless.

Hidden GemsAt our small-cap newsletter, Motley Fool Hidden Gems, we've noticed two things. First, great stock investors own small-cap stocks. Second, over the long haul, smaller company stocks outperform their mid- and large-cap peers. These are the stocks that can increase in value five to 10 times -- or more -- over three to five years.

We think there are two main reasons why small-caps are promising. For one thing, smaller companies tend to be less bureaucratic and infinitely more nimble. They're much more likely to be run by focused, entrepreneurial leaders -- often the very founders of the business -- with huge personal stakes on the line.

In addition, institutional investors simply handle too much money to mess with small stocks, and their clients are way too conservative. As a result, tomorrow's big winners are shunned both by large investors and the Wall Street analysts who cater to them. By focusing on financial performance, quality of management, and intrinsic value, we find tomorrow's best stocks before the crowd discovers them.